The Easy Money Contagion

Monetary expansion is all the rage in the major economies, with central bank after central bank employing tools like quantitative easing and ultra-low – or even negative – interest rates to boost their economies’ competitiveness. Where does it end?

JACKSON HOLE, WYOMING – To consider the actions taken by the world’s major central banks in the past month is to invite an essential question: when – and where – will all this monetary easing end?

At the end of July, the Bank of Japan announced that it would maintain its current negative interest rates and bond-buying program. At the same time, the BOJ pledged that it would nearly double its annual purchases of equity-traded funds, from ¥3.3 trillion ($32.9 billion) to ¥6 trillion. And yet the announcement of a monetary-policy package that in a different era would have been considered inconceivably accommodative, actually disappointed financial markets. To the chagrin of Japanese policymakers, the yen strengthened against major currencies.

Then, in early August, the Bank of England cut borrowing costs, boosted its quantitative easing (QE), and committed an extra £100 billion ($131 billion) to encourage banks to lend. Responding to the pound’s significant depreciation against the US dollar and other currencies following the United Kingdom’s vote in June to leave the European Union, the BoE indicated the move was a pre-emptive effort to mitigate the recessionary pull of Brexit. In response to the new monetary stimulus, the London stock market surged and the UK pound slid further.

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Professor Rinehart, in this article, is asking exactly the right question "when and where will these rounds of central banks' near zero or negative interest rates end ?" and what tools, if any, will the central banks deploy when the next financial crisis hit ?

Unless, of course, all the major central bankers agree to a sequence of "globally coordinated interest rates increases". Is that what Fed Chairwoman Yellen and company are doing at Jackson Hole, Wyoming ?

One sure hope so. It is time for the Fed to lead the world's central bankers onto the road to increasing interest rates.

"Contagion" is a nice choice to describe the action in international currency markets because it leaves open the question as to whether countries are acting out of fear that their products are becoming less competitive or out of envy at the success some nations have had in shoring up asset prices in the wake of what was once described as a "balance sheet recession." That in turn blurs the question of who gains from accomodative monetary policies: those working (and investing) in goods and service markets, or those trading in markets for existing assets. Reinhart could help sort this out, but ducks the question, making only one questionable comparison of Germany, which is but one part of the Eurozone, with the United States, which has its own currency. One should remember that the 1920s reflation ended with a crash, and hope that the current mania for accomodative policies does not drive so large a wedge between asset prices and underlying income flows that a similar result becomes unavoidable.

Nobody is seeing that the easy money is the only action than de Central Banks can take in this moment. The global economy is facing a long term slowdown. The Friedman answer to this situation was precisely easy money. But the situación has been proving that the Central Bank intervention is not enough. The other actor, than is not yet participating in the game, is the government through the invesment in public infraestructure, innovation, etc. The public intervention during the Great Depressión was the only way to get out of that situation. Some times I think that we, the economists, are blind about the historical facts and do not learn about the lessons of the past.

I agree with your argument Mr Zamora (except for the "adjectives" to economists, or anyone for that matter Mr. MM,...never helpful in healthy debate); the only way out of this mess demands a response like in the 30s, albeit considering the big difference between both situations: in this one, most countries' public sectors have no means to finance the required size of investment: 1) debt/GDP are in record highs, 2) financial markets have enormous power to punish excess debt (e.g. EZ crisis), and 3) more taxes at this point, as pointed by Mr. Birkett, are a "no-no". Thus, the only way to finance the required push is via Supranational coordination at large scale (both in terms of financing, ultimately backed by new-QE, and in terms of investing, focusing on a few global themes: climate change + EM infrastructure), structuring such a financing long enough so that the repayment do not hit until (hopefully) growth recovers and public balance-sheets have restored (i.e. so starting no sooner than, 10-15 years at minimum, and repaying for another 15 or so). The size of investment... pulling from a recent MGI study, I reckon a whooping $15tr type of effort (perhaps more).

I would suggest that Laffer is largely right about what needs to be done and that the tax increases in 1936 hold huge blame.
Living in part of Europe, I see clearly how taxes are bleeding the economy from having any possible type of real recovery. Low cost money means nothing if taxes siphon away all returns - both to capital and labor.

I think one of the main problems is that the inflation is measured wrong. For example, inflation is low but it's low because it's not including prices on housing and land, among many other things that skyrocket in price with low interest rates while the inflation is 'low'

The required solution is to tax official foreign reserves (central bank reserves) that finance trade deficits. This promotes balanced trade without punishing trade or targeting an industry. Game theory supports this proposal. Until then, we will have continued money printing until capital controls are imposed and we lose our economic freedom.

Yes Carmen, we are easing money to devaluate all our currencies. It's the new virus all central banks have caught.

Yes Carmen, the virus also leads central banks to make interest rates equal to zero to stimulate the economy to invest, that then doesn't invest because the returns are equal to zero.

Yes Carmen, Fisher was very wrong in his equality, no, MV doesn't equal PY, there is the CR factor he forgot, the Carmen Reinhart factor that allows no inflation on an expanding monetary base. Its all a virus to devaluate the currencies, we are all at the ZLB because like Fisher told, exchange rates depend on interest rates, and Central Banks all have this virus that makes them want to do policy and keep us at the ZLB.

Or its all an exporting sector conspiracy with central banks… Zero interest rates and a depreciated currency, what world could be better for them?

Ring-a-ring o' roses,
A pocket full of posies,
A-tishoo! A-tishoo!
We all fall down.

Carmen. The Gt Recession knocked circa 7% off the economy. Propping up the banks extended the dampener on uplift. The bank prop-up has not been completed as the problem is still in the system and dominates all policy. There has been no effective reform. To all intents and purposes the drag on the economy because of banks has become perpetual. Too many zombies. Politicians are unable to move as they are surrounded by zombies on one side and agitated voters on the other leaving only the Central Bonkers - All the CBs have left is the zero boundary and they have bumped up against it. They do however have an infinite supply of zeros so it it could continue some time

At this point we need a CB song -

I'm turning Japanese I think I'm turning Japanese I really think so
Turning Japanese I think I'm turning Japanese I really think so
I'm turning Japanese I think I'm turning Japanese I really think so

What currency devaluation and competitive monetary programs seek tp accomplish is to import demand and export unemployment. In this game of musical chairs, the US has usually been the one left standing, balancing the world economy by exporting demand and absorbing unemployment.

But in today's political climate, that policy will no longer be tolerated by the US electorate. So, as Reinhart points out, the US Fed, by not raising interest rates, took the opposite course of action.

As long as countries like Germany pursue policies that produce unending surpluses, it will be very hard for the Fed to resume its role as the world economy's equilibrator.

Carmen, it is futile to go against the tide, to raise interest rates and make the US$ stronger when everyone else has embarked on a plan of devaluing their own currencies. In real terms, there has been no monetary easing, because the central bankers policies have been executed too little, too late and to coincide with the US elections and therefore to hide their wrong doings, a usual practice. The next to zero interest rates are aimed primarily at bailing out the banks, some large corporations and some of the players in the equity markets (and these already cashed in on the facilities offered) at the expense of the tax payers. Let us call it indirect taxation, whereby the tax payers are seeing the value of their money and savings to include pensions deteriorating in front of their eyes just to bailout yet again failed political and financial systems. When will it end? When the 1% becomes 30% or the world is returned to the 30s' and not to the 80s', a very odd number this 30!

The globalisation paradigm seems all the more real than ever before. The US Fed seems clueless much like most of the other big central banks. The paradoxes seems like confusion confounded. Negative interest rates are disruptive & is the new normal. However, The US Fed, in addition to monitoring domestic economy, has the task of managing the world's economy & its currency markets. A strong dollar is hurting US but is inevitable as other countries create conditions to devalue their own against the dollar. One, therefore, expects the US Fed to indicate an interest rate hike to cool down, not only inflationary expectations but also to stave off the beggar thy neighbour policies of other countries. Boosting demand & raising growth is a arduous task given the moribund nature of growth across continents barring India. China is mired in a vortex of slowing growth, falling exports & currency devaluation. China has been encouraging big businesses & the wealthy to invest abroad considering the fall in values across asset classes.
The US would have to take the lead in reviving its economy before one expects the effects to percolate to other countries. But for this to happen, the US Fed may have to hold rates or even lower them. Yellen seems to occupy the most unenviable chair right now.

Can the central bank even impact the economy through currency rates? Maybe in the very short term, but long term it cannot. Didn't the Brits try to maintain a strong currency to no avail in the memory of their declining empire?

Dan, exchange rates are a function of forward interest rates.. see Fisher for that.

But no, Central Banks don't do exchange rate policies, except to stabilize it, and no Central Banks are not the cause of the Zero Lower Bound , interest rates will remain, and have remained, at zero no matter what Central Banks do

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